Global X Funds, the New York-based ETF provider known for its niche funds, rolled out today an ETF that taps into master limited partnerships, going head-to-head with ALPS’ Alerian MLP ETF (NYSEArca:AMLP – News) and a group of ETNs.
The Global X MLP ETF (NYSEArca:MLPA – News) will track a Solactive Index and comprise some 30 MLPs involved in everything from transportation to storage to processing, refining, marketing and mining of natural resources. The fund will cost 0.45 percent, according to the most recent paperwork the company filed with U.S. regulators, compared to AMLP’s 0.85 percent expense ratio.
Global X is hoping its cheaper price tag will give MLPA a competitive edge over its well-established competitors:AMLP, which has already gathered some $2.8 billion in assets in less than two years; and the $4 billion JPMorgan Alerian MLP ETN (NYSEArca:AMJ – News), which also costs 0.85 percent.
MLPs are partnerships that generate most of their income from the natural resources sector, but they make money from fees rather than from the underlying commodities themselves, which protects them from volatility spikes in commodities prices.
That structure also means MLPs are not taxed as corporations, and as such, they tend to pay hefty dividends, an attractive feature in times of ultra-low interest rates. Indeed, MLPs have recently been paying higher yields than some other income asset classes such as REITs and utilities, and they have outpaced many equities-focused portfolios.
But the attractions aren’t without pitfalls. MLP-based ETFs are, in fact, taxed as corporations, unlike most other ETFs, which puts them at risk for double taxation: The fund must pay government taxes as a corporation would before it can pay shareholders.
Even as distributions to investors in many cases are deemed nontaxable return of capital, the complex tax structure could affect overall returns and cause the fund’s performance to diverge from its index.
AMLP’s performance in 2011 exemplified this issue. The fund ended the year with a tracking error that neared 7 percent , the highest in a pool of more than 700 ETFs surveyed by Morgan Stanley.
MLPA’s launch comes only a month after New York-based asset manager Yorkville rolled out the Yorkville High Income MLP ETF (NYSEArca:YMLP – News), which costs 0.82 percent.
YMLP, however, serves up a commodities-based MLP portfolio that offers little, if any, overlap to broader infrastructure-focused exposure such as AMLP’s.
Other strategies in the space include a group of ETNs such as the Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca:MLPY – News), which focuses on energy transportation MLPs, as well as the Credit Suisse Cushing 30 MLP ETN (NYSEArca:MLPN – News).
UBS also sponsors a roster of E-Tracs MLP ETNs that serve up narrowly focused portfolios as well as leveraged and inverse plays.
Still To Come
Global X has another MLP-focused ETF currently sitting in the regulatory pipeline that would hone in on natural gas MLPs.
The Global X MLP Natural Gas ETF (NYSEArca:MLPZ) should cost 0.58 percent, the company said in the same filing detailing MLPA. The fund will also track a Solactive Index, but consist of some 20 MLPs involved with the exploration, production and marketing of natural gas.
It’s not clear when MLPZ will come to market, but recent regulatory paperwork filed by Global X suggests a launch could be imminent.
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